Real estate investors often invest so much of their personal time, work, and money in their properties that their personal and business finances begin to blend. However, letting the boundaries between the two blur can lead to serious problems.
Most significantly, corporations, partnerships, and LLCs are required by law to maintain official business accounts. Therefore, if you formed an LLC to limit your personal liability, you'll need to make sure that LLC remains in good standing. If your property (LLC) happens to be sued, the plaintiff may attempt to show that you have not maintained your LLC to the letter of the law. If successful, your LLC shield can be revoked and they can seek recovery against your personal assets.
Keeping a strict line between your personal and businesses finances is one of the most important steps toward maintaining a compliant LLC. Fortunately, it's relatively easy to do so — it just takes some organization upfront and a little discipline as you go forward.
Here's how you can peel your business finances away from your personal:
Open a business checking account
Maintain separate checking accounts — set up a bank account for your LLC and make sure to use the same address you used for your legal paperwork to the secretary of state (when you formed your LLC). This simple step will also help you come tax time, as all your income and expenses related to the property will be in one place. You won't have to try to separate deposits and expenses in April. And it will be much easier to justify deductions, as all purchases will be clearly defined as business expenses related to the property.
Open a business credit card
Along the same lines, open a separate credit card. Like the separate checking account, a credit card will help your record keeping and give you something to show the IRS in case you're ever audited. And try putting all business expenses on the card (or, on the debit card linked to your business checking account – just don't use cash…. If you lose that cash receipt, there's no other record of the money that was spent). In some cases, a business credit card can even give you extra tax deductions if you need to carry a balance.
Of course, setting up these accounts is just the first step. They're meaningless if you fail to use them consistently. When your shopping basket contains a mix of personal and business purchases, it's all too tempting to just use your own check or credit card for everything. However, stay disciplined. That little extra time will make your life a whole lot easier at tax time, and will help ensure your LLC stays compliant to protect your assets.